A model of a labor market is developed in which agents possess private information about their marginal products. As a result, involuntary unemployment may arise as a consequence of attempts by firms to create appropriate self-selection incentives. Moreover, employment lotteries may arise for the same reason despite the fact that, in equilibrium, there is no uncertainty in the model. When employment is random, this is both privately and socially desirable. Finally, it is shown that the unemployment that arises is consistent with (a) pro-cyclical aggregate real wages and productivity, (b) employment that fluctuates (at individual and aggregate levels) much more than real wages.

A simple stochastic model of the firm is constructed in which a dynamic monopolist who maximizes a discounted profits stream subject to labor adjustment costs and given factor prices sets output price as a distributed lag of past wages and input prices. If the observed relation of wages and prices in manufacturing arises solely from this behavior then wages and input prices are exogenous with respect to output prices. In tests using quarterly and monthly series for the straight time wage, an index of raw materials prices and the wholesale price index for manufacturing and its durable and nondurable subsectors this hypothesis cannot be refuted for the period 1955:1 to 1971:11. During the period 1926:1 to 1940:11, however, symmetrically opposite behavior is observed manufacturing wholesale prices are exogenous with respect to the wage rate, a relation which can arise if dynamically monopsonistic firms compete in product markets. Neither structural relation has withstood direct wage and price controls.

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate whether New Deal cartelization policies designed to limit competition among firms and increase labor bargaining power can account for the persistence of the Depression. We develop a model of the intraindustry bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.